Fear and Loathing in 3PAR Bidding War

Fear walks tall, wears steel-toe boots, and carries a baseball bat in the showdown between HP and Dell for ownership of 3PAR.

Keeping tabs on the escalating bidding war isn’t easy, but as of this morning HP assumed the pole position, with a counterbid that values 3PAR at $30 per share,or a whopping $2 billion. If Dell follows its established form in this saga, it will match HP’s bid and regain the upper hand. What happens after that is anybody’s guess.

By this point, talk of price-to-revenue or price-to-earnings multiples is beside the point. The winning bidder, even if does reduce 3PAR’s production costs and increase its sales footprint significantly, will have a difficult time justifying the transaction on the basis of quantifiable business metrics. This has become a strategic play, as much about keeping 3PAR away from the other guy as about its intrinsic business value.

3PAR as Chess Piece

That’s not say 3PAR doesn’t have business value. Clearly it does. A stable of high-profile enterprise and service-provider customers have adopted its technology, and the company is seen as the best entrant in a limited filed of high-end storage players that are available for acquisition.

Still, as a chess piece on the data-center convergence board, how valuable is 3PAR? Does it, in and of itself, reinvent or change the game? Is it a unique asset that confers long-term account control and sustainable competitive advantage for years to come?

There’s probably some of that value to be had here, yes, but not on the scale of, let’s say, Cisco’s $95-million acquisition of Crescendo in 1993, which begot the ever-growing line of Catalyst switches, enterprise-networking market dominance, billions of dollars in annual revenue, and seemingly endless tributaries of profitability.

Then There’s Fear

I just don’t see 3PAR on that scale. So, if sunny optimism and visions of bright tomorrows aren’t driving Dell and HP to engage in this duel, what is? Well, there’s greed and then there’s fear. This feels a lot like fear.

Both vendors are afraid of being squeezed in high-end storage. They’re afraid of each other, and they’re afraid of other parties not directly involved in the transaction. There’s no question, for example, that Cisco and EMC are haunting these proceedings.

In expressing their covetousness for 3PAR so publicly, Dell and HP are exposed, their desires and discontents disclosed for all to see. They’ve sent some clear signals to the market that will not be misconstrued by current — perhaps soon to be erstwhile — partners.

Desires and Discontents

Let’s start with Dell. It can say all it wants about how its relationship with EMC is perfectly fine, but anybody with eyes can see that Dell is building a storage portfolio that will be arrayed (pardon the pun) against EMC across the known universe, from SMBs all the way up to the largest enterprise accounts. The fact is, Dell’s relationship with EMC has been strained for a while, and it will get worse. Another fact is that even though Dell doesn’t carry EMC’s Symmetrix, it will be selling a competing product if it wins its battle against HP for 3PAR. I’m sure EMC is paying attention.

As for HP, it’s clearly not content with the foundering performance of its midrange EVA platform or with its arrangement as a reseller of Hitachi Data Systems’ Universal Storage Platform (USP). There are probably at least a couple reasons for HP’s dissatisfaction with the Hitachi relationship, but it’s apparent that the marriage is in serious trouble. Dave Donatelli — HP’s head of enterprise servers, storage and networking (ESSN) — has a wandering eye for hot high-end storage, and he’s doing more than looking in his amorous pursuit of 3PAR.

Again, I’m sure Hitachi has noticed these developments. If it were smart, it would make contingency plans to account for a potential loss of HP’s business. Even if that doesn’t happen now, as a result of HP’s acquisition of 3PAR, it’’s bound to happen later. It’s just a matter of time.

Fear is a stern taskmaster, He’ll continue to drive his fair share of vendor combinations and machinations in the converged data center.

With Hurd so recently departed, I can’t help think that this out of control bidding process is an indication of a power struggle within HP. At 2 billion, while not a “bet the company” kind of price, this acquisition is really hard to justify.